Crypto asset investing has the attention of many retail investors and continues to grow in popularity and appeal, particularly with the launch of the first U.S. bitcoin futures ETFs last week. Institutional investors are much slower to consider investing in the space, and so far, the volatility and ESG risks associated with a market that is increasingly driven by emissions concerns and sustainability practices have proven barriers to investment.
A recent study put out by MSCI has found that cryptocurrency may be creeping into the portfolios of institutional investors without their knowledge. The exposure comes from indexes that are adding crypto-related companies into the securities they track, as well as established companies that are taking on cryptocurrency investing.
Of the companies contained within the MSCI ACWI Index, a global equity index that contains large- and mid-cap securities, 26 had exposure to cryptocurrencies, and the MSCI ESG Research-covered securities contained a total of 52 companies with cryptocurrency exposure.
Bitcoin is still by and large the most common cryptocurrency investment of choice, and while it is a volatile asset class, the potential for returns has more companies actively seeking exposure. Additionally, cryptocurrency exchanges such as Coinbase have become a popular investment choice, as their volatility can run opposite to that of cryptocurrencies at times and they can carry different risks, but they still have direct exposure to cryptocurrencies.
There are a variety of crypto tokens available, all with varying ESG risks, but bitcoin is often considered one of the higher emissions-producing cryptocurrencies on the market. Of the ESG risks associated with cryptocurrencies, emissions and electronic waste rank highest, and those that require proof-of-work to generate tokens, such as bitcoin, often require the most energy usage.
The social and governance risks of crypto assets and cryptocurrencies are still a somewhat unknown but could include things such as transaction disputes for companies that deal in cryptocurrency as a form of payment, and risk-management policies needing to be changed by the boards of companies that are gaining cryptocurrency exposure in their investments. Many of the risks within crypto are major risks for most companies, including cybersecurity, avoiding money laundering, and the financial risks of cryptocurrencies themselves.
“Regardless of whether a cryptocurrency-exposed company passively monitors or actively engages in the governance of cryptocurrencies, understanding how it approaches the intersection of its strategic plan and the long-term development of cryptocurrencies may help investors make more informed risk decisions,” wrote the authors of the study, and this insight particularly applies to ESG risks associated with cryptocurrencies.
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